UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2003
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.: 000-33471
YAK COMMUNICATIONS INC.
(Exact name of small business issuer as specified in its charter)
| | |
| Florida | | 98-0203422 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
55 Town Centre Court, Suite 610, Toronto, Ontario, Canada, M1P 4X4
(Address of principal executive offices)
(416) 296-7111
(Issuer’s Telephone Number, Including Area Code)
Yak Communications (USA), Inc.
(Former Name, Former Address and Former Fiscal Year, if changed since last report)
Indicate by a check mark whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
As of February 1, 2004, 11,423,250 shares of the issuer’s Common Stock, no par value per share, were outstanding. (This amount reflects a two-for-one stock split, effective January 29, 2004.)
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
INDEX TO FORM 10-QSB
i
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
Immediately following the signature page in this Form 10-QSB.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein should be read in conjunction with the Consolidated Financial Statements of Yak Communications Inc. and Subsidiaries, and the related notes to the Financial Statements included in the Company’s Form 10-KSB for the fiscal year ended June 30, 2003, and the Consolidated Financial Statements and the related notes to the Consolidated Financial Statements included in Item 1 of this quarterly report on Form 10-QSB. Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. and have been audited by our independent auditors.
The financial information in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refers to our continuing operations.
Overview
We are a provider of discount, long-distance telecommunication services in Canada and the U.S. to residential and small-to-medium business enterprises. We primarily concentrate our marketing efforts towards consumers that make significant amounts of international calls directly targeting ethnic markets and communities in major urban centers.
Our primary product offering is dial-around services (also known as “casual calling”) at variable and flat rate pricing. Casual calling allows our customers to dial-around their existing long distance carrier on any call by entering a few digits prior to making the call, without permanently switching long distance carriers. We offer “1+ billing” which allows our customers to permanently switch all of their calls from their existing long distance carrier to our long distance service. We also offer telecom management services.
Results of Operations
Comparison of six months ended December 31, 2003 and 2002
Net revenue increased $21,555,353, or 123%, to $39,031,547 for the six months ended December 31, 2003, when compared to the six months ended December 31, 2002. This increase in revenues resulted partly from our July 2, 2003 acquisition of Contour Telecom Inc. (“Contour”) and its subsidiary, Argos Telecom Inc. (“Argos”), which collectively added sales of
1
$8,949,000. The balance of the increase was a result of (i) sales of our “Looney Call” product, which added revenues of $4,226,000 compared to $70,000 for the comparable period in 2002, and (ii) continued growth in Canadian markets, which increased sales by $8,610,000. Our revenue in our U.S. operating territories decreased by $230,000 to $485,000 for the six months ended December 31, 2003, from $715,000 for the six months ended December 31, 2002.
Cost of revenue increased $14,660,447 or 135%, to $25,493,318 for the six months ended December 31, 2003, from $10,832,871 for the six months ended December 31, 2002. Cost of revenue is comprised primarily of the cost of long distance services, fees for the processing and transporting of our calls and fixed and variable line access costs. The overall cost of revenue increased to 65% of sales for the six months ended December 31, 2003, from 62% of sales for the six months ended December 31, 2002. This increase in cost of sales is a result of the lower margins of our Contour and Argos businesses as compared to those of our core dial-around operations. The cost of long distances services has increased to 36% for the six months ended December 31, 2003, from 34% for the six months ended December 31, 2002, as a result of lower rates charged to customers.
General and administrative expenses (“G&A”) increased $3,460,442 or 217%, to $5,050,270 for the six months ended December 31, 2003, from $1,589,828 for the six months ended December 31, 2002. Of this increase, $2,037,000 resulted from our acquisition of Contour and Argos. The largest component of G&A was salaries, which increased to $2,296,000 for the six months ended December 31, 2003, from $754,000 for the six months ended December 31, 2002. This salary increase was a result of hiring additional administration, technical and customer service employees that were required to support our growth during fiscal year 2004, and included $1,222,000 in salaries from our acquisition of Contour and Argos. G & A expenses at the holding company level increased by $439,000 due to the increasing costs of operating as a public company and the costs of developing the Company’s new growth opportunities.
Sales and marketing expenses decreased $64,483 or 3% to $1,971,263 for the six months ended December 31, 2003, from $2,035,746 for the six months ended December 31, 2002. Sales and marketing expenses in the U.S. decreased $751,000. An increase of $664,000 is due to additional spending for marketing and advertising, and launching new products to increase our revenue base in our Canadian markets.
Accounts receivable financing costs related to the factoring of our trade accounts receivable, increased $89,961 or 44%, to $291,916 for the six months ended December 31, 2003, from $201,955 for the six months ended December 31, 2002. This is due to a 91% increase in the amounts financed.
Organizational and start-up costs for the development of new operations were $86,647 for the six months ended December 31, 2003, as compared to $106,534 for the six months ended December 31, 2002. These costs were composed primarily of legal and consulting fees incurred to obtain the regulatory licenses and contracts for our operations outside Canada. For the six months ended December 31, 2003 organizational and start-up costs include $24,337 expended for the development of our international operations in Peru.
2
Depreciation and amortization increased $1,109,967, or 309%, to $1,468,788 for the six months ended December 31, 2003, as compared to $358,821 for the six months ended December 31, 2002. This increase resulted primarily from an increase in capital spending and a reduction in the estimated useful life of existing telecommunication switching systems, which amounted to $555,000 of increase depreciation and $200,000 amortization of customer lists of for the period.
Net income increased by $1,558,075 to $2,940,150 for the six months ended December 31, 2003, from $1,382,075 for the six months ended December 31, 2002.
Comparison of three months ended December 31, 2003 and 2002
Net revenue increased $10,943,240 or 118%, to $20,240,329 for the three months ended December 31, 2003, from $9,297,089 for the three months ended December 31, 2002. This increase resulted partly from our acquisition of Contour and Argos, which added sales of $4,358,000. The balance of the increase was a result of our “Looney-Call” product, which added $4,226,000 compared to $70,000 for the same period in 2002 and continued growth in our Canadian markets which increased sales by $2,517,000. Our revenue in our U.S. operating territories decreased by $158,000 to $225,000 for the three months ended December 31, 2003, from $413,000 for the three months ended December 31, 2002.
Cost of revenue increased $7,863,425, or 144%, to $13,296,799 for the three months ended December 31, 2003, from $5,433,374 for the three months ended December 31, 2002. Cost of revenue is comprised primarily of the cost of long distance services, fees for the processing and transporting of our calls and fixed and variable line access costs. The overall cost of revenue increased to 65% of sales for the three months ended December 31, 2003, from 58% of sales for the three months ended December 31, 2002. This increase in cost of sales is a result of the lower margins of our Contour and Argos businesses as compared to those of our core dial-around operations. The cost of long distances services has increased to 35% for the three months ended December 31, 2003, from 33% for the three months ended December 31, 2002, as a result of lower rates charged to customers.
G&A increased $1,904,506 or 211%, to $2,805,131 for the three months ended December 31, 2003, from $900,625 for the three months ended December 31, 2002. Of this increase, $897,000 resulted from our acquisition of Contour and Argos. The largest component of G&A was salaries, which increased to $1,156,000 for the three months ended December 31, 2003, from $413,000 for the three months ended December 31, 2002. This salary increase was a result of hiring additional administration, technical and customer service employees that were required to support our growth during fiscal year 2004 and included $632,000 in salaries from acquisition of Contour and Argos. G&A of our holding company increased by $319,000 due to the increasing costs of operating as a public company and developing new growth initiatives along with due diligence costs for potential investments.
Sales and marketing expenses increased $30,625 or 3% to $1,076,959 for the three months ended December 31, 2003, from $1,046,334 for the three months ended December 31, 2002. Our
3
spending in the U.S. decreased by $322,000 as management re-evaluates its U.S. strategy. An increase of $292,000 is due to additional spending for marketing and advertising, and launching new products to increase our revenue base in our Canadian markets.
Accounts receivable financing costs related to the factoring of our trade accounts receivable, increased $29,333, or 26%, to $141,713 for the three months ended December 31, 2003, from $112,380 for the three months ended December 31, 2002. This increase is a direct result of larger borrowings for the three months ended December 31, 2003.
Organizational and start-up costs for the development of new operations were $53,623 for the three months ended December 31, 2003, as compared to $47,762 for the three months ended December 31, 2002. These costs were composed primarily of legal and consulting fees incurred to obtain the regulatory licenses and contracts required to launch our international operations in Peru.
Depreciation and amortization increased $378,839, or 160%, to $615,820 for the three months ended December 31, 2003, as compared to $236,981 for the three months ended December 31, 2002. Depreciation and amortization has increased over the last fiscal years as capital spending and due to the reduction in the estimated useful life of existing telecom switching systems.
Net income increased by $604,030 to $1,344,392 for the three months ended December 31, 2003, from $737,362 for the three months ended December 31, 2002.
Liquidity and Capital Resources
Our liquidity needs are for operating activities, purchases of capital assets and interest and principal payments on outstanding indebtedness. To date, we have financed our growth through internally generated funds, borrowings (including accounts receivable financing, vendor financing and capital lease financing) and, initially, the private placement of equity securities.
Net cash provided from operating activities increased to $6,946,557 for the six months ended December 31, 2003, from $1,109,765 for the six months ended December 31, 2002. This was principally due to the increase in our net income from operations to $6,079,110 for the six months ended December 31, 2003, from $1,810,851 for the six months ended December 31, 2002.
Net cash used in investing activities was $8,692,296 for the six months ended December 31, 2003, as compared to $591,360 for the six months ended December 31, 2002. For the six months ended December 31, 2003, the Company used $2,776,037 for acquisition of property and equipment and $5,472,712 to acquire Contour.
Net cash used by financing activities was $614,243 for the six months ended December 31, 2003, as compared to $927,591 provided by financing activities for the six months ended December 31, 2002. The increase in 2002 was principally due to the increase in advances from Telus Corp. of $1,022,250 during the six months ended December 31, 2002 of which $322,239 was repaid during the six months ended December 31, 2003. In addition, on December 31, 2003, we repaid a short-term loan in the amount of $713,570 which was received on July 15, 2003.
4
In September 2003, we acquired “state of the art” switching equipment for approximately $2 million, $1,122,000 of which has been paid to date. $748,000 was paid in cash and the balance was financed over a period of 60 months. Under our financing arrangement, monthly payments of approximately $74,700 are due through the end of fiscal year 2004 and, thereafter, we will make 51 monthly payments of approximately $17,800 each.
We believe we have sufficient fixed capacity to meet our anticipated volume of telephony traffic in both Canada and the U.S. during fiscal 2004. In addition, with the acquisition of the switch, we believe we are capable of providing for future long-term growth as well as accommodating technological change. With this new switch, we expect to migrate our traffic from our more traditional legacy systems to these next generation platforms.
During the remainder of fiscal year 2004, we expect that we will require approximately $1.5 million for our broadband initiatives and to expand our existing offices. These expenditures are expected to be funded from our internal cash flows.
Critical Accounting Policies
Yak’s consolidated financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates, assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenue and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 2 of our consolidated financial statements. While all these significant accounting policies impact its financial condition and results of operations, the Company views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company’s consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
5
Our critical accounting policies are as follows: determining functional currency for the purpose of consolidation; and valuation of long-lived assets.
Determining Functional Currency for the Purpose of Consolidation
We have a foreign subsidiary in Canada that accounts for 99% of our revenue and 93% of our assets as of December 31, 2003. In preparing our consolidated financial statements we translate the accounting records from Canadian dollars into U.S. dollars. This process results in exchange gains and losses which under the provisions of SFAS No. 52 and SFAS No. 130, are included as a separate part of our net equity under the caption “accumulated other comprehensive income.” Under these provisions, the treatment of these translation gains or losses is dependant upon our management’s determination of the functional currency of our subsidiary. The functional currency is determined based on management’s judgment of the currency that its subsidiary conducts substantially all of its transactions, including billings, financing and other expenditures, which also includes the dependency upon the parent and the nature of the subsidiary’s operations.
Valuation of Long-lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable from the estimated future cash flows expected to result from their use and eventual disposition. Our long-lived assets subject to this evaluation include property and equipment and amortizable intangible assets. We assess the impairment of goodwill annually in our fourth fiscal quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. Intangible assets other than goodwill are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be fully recoverable. We are required to make judgments and assumptions in identifying those events or changes in circumstances that may trigger impairment. Some of the factors we consider include: (i) significant decrease in the market value of an asset; (ii) significant changes in the extent or manner for which the asset is being used or in its physical condition; (iii) a significant change, delay or departure in our business strategy related to the asset; (iv) significant negative changes in the business climate, industry or economic conditions; and (v) significant changes in technology.
When we determine that the carrying value of property and equipment may not be recoverable, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management. Major factors that influence our cash flow analysis are our estimates for future revenue and expenses associated with the use of the asset. Different estimates could have a significant impact on the results of our evaluation. For example, we may need to revise our estimates to accommodate more rapid depreciation with respect to certain equipment due to expected changes in relevant technologies. Net property and equipment totaled $7,129,072 as of December 31, 2003, representing 24% of our total assets.
6
TRENDS
During the six months ended December 31, 2003, the Company focused on expanding its operations across Canada. As a result of our acquisition of Contour in July 2003, we are able to expand our customer base to small and medium business and to also expand telecommunication services offered to our customers. For the twelve month period before our acquisition (period ended June 30, 2003), Contour had revenues of $21,266,155. We expect this amount to be similar for the next 12 months ended June 30, 2004. We believe that we can successfully integrate the operations of Contour and as a result obtain certain synergies that we expect will have a positive effect on both sales and net income with no anticipated corresponding material impact on liquidity.
We believe that our current operations will be able to generate sufficient cash to meet our current obligations and maintain our planned level of operations. We have no further significant cash commitment to develop our international operations in Peru. In July 2003 we received a short-term loan of $720,000 ($1,000,000 Canadian), which was repaid on December 31, 2003. In connection with this loan, we issued 10,000 shares of our common stock to the lender. We may seek to obtain additional funds from public or private equity or debt offerings to fund new opportunities that may arise.
We have altered our U.S. expansion strategy based on the historic low return on investment, i.e., cost to acquire U.S. customers. The Company is exploring the opportunity to acquire a company with material U.S. telephony operations to use as a platform for its growth in the U.S. market. The success of any such acquisition will depend on the proper and efficient integration of the operations of any newly-acquired businesses.
FORWARD LOOKING STATEMENTS
From time to time, we make statements about our future results in this Form 10-QSB that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations and the current economic environment. Such statements are subject to known and unknown risks and uncertainties that could cause actual future results and developments to differ materially from those currently projected. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and in the Company’s other reports filed with the SEC. Our actual results could differ materially from those expressed or implied in the forward-looking statements. Important assumptions and other important factors that could cause our actual results to differ materially from those in the forward-looking statements, include, but are not limited to: (i) access to sufficient working capital to meet our operating and financial needs; (ii) our ability to respond to growing competition in our markets for
7
discount long distance services as well as the extent, timing and success of such competition; (iii) our ability to expand into new markets and to effectively manage our growth; (iv) the profitability of our entry and expansion into the U.S. market; (v) customer acceptance and effectiveness of us as a discount long distance provider and our ability to assimilate new technology and to adapt to technological change in the telecommunications industry; (vi) our ability to develop and provide voice over internet and web-based communications services; (vii) changes in, or failure to comply with, applicable governmental regulation; (viii) our reliance on our key personnel and the availability of qualified personnel; (ix) the duration and extent of the current economic downturn; (x) general economic conditions or material adverse changes in markets we serve; (xi) the risk that our analyses of these risks could be incorrect and that the strategies developed to address them could be unsuccessful; (xii) changes in our accounting assumptions that regulatory agencies, including the Securities and Exchange Commission, may require or that result from changes in the accounting rules or their application, which could result in an impact on our earnings; (xiii) integrating the operations of our newly-acquired businesses; (xiv) the successful deployment of new equipment and realization of material savings there from; and (xv) various other factors discussed in this filing. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. The Company believes that its assumptions are based upon reasonable data derived from and known about its business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of the Company’s future activities will not differ materially from its assumptions.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statements of Accounting Standards (“SFAS”) No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” effective for fiscal years beginning after December 15, 2001. Under the rules, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to annual impairment tests in accordance with the Statements of Accounting Standards. The Company applied the new rules of accounting for goodwill and other intangible assets beginning the first quarter of fiscal year 2003, and there was no material impact on the Company’s financial statements.
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 established a single accounting model for the impairment or disposal of long-lived assets. As required by SFAS No. 144, the Company adopted this new accounting standard on July 1, 2002. The adoption of SFAS No. 144 did not have a material impact on the Company’s financial statements.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 eliminates an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions and established that gains and losses from extinguishment of debt should be classified as extraordinary items only if they meet the criteria of extraordinary. There was no material impact on the Company’s financial statements as a result of adopting SFAS No. 145.
8
SFAS No. 143, “Accounting for Asset Retirement Obligation” was adopted by the Company in fiscal year 2003. Under this SFAS, asset retirement and the obligations associated with the retirement of tangible, long-lived assets will change. This statement will not have a material effect on our financial statements as presented.
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost that is associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 also establishes that fair value is the objective for the initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company did not have any such activities during the six months ended December 31, 2003.
Item 3. Controls and Procedures
Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our principal financial officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-QSB. Based on this evaluation, our Chief Executive Officer and our principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-QSB that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting
Item 4. Submission of Matters to a Vote of Security Holders.
On December 15, 2003, the Company held its annual meeting of shareholders. The following proposals were approved at the annual meeting:
| | • | The board of directors consisting of Charles Zwebner, Anthony Greenwood, Anthony Heller, Adrian Garbacz and Joseph Grunwald, was re-elected. The results of the balloting for this proposal was: 3,465,991 for, 0 against and 0 abstain. |
| | • | An amendment to the Company’s Articles of Incorporation to change the Company’s name to Yak Communications Inc. was approved. The results of the balloting for this proposal was: 3,460,551 for, 0 against and 5,440 abstain. |
9
| | • | The appointment of Horwath Orenstein LLP as our independent auditors was approved. The results of the balloting for this proposal was: 3,457,451 for, 1,100 against and 7,440 abstain. |
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
| | |
| |
| 10.1 | | Executive Employment Agreement, dated November 17, 2003, by and between Yak Communications Inc. and David B. Hurwitz. |
| |
| 10.2 | | Option Agreement, dated November 17, 2003, by and between Yak Communications Inc. and David B. Hurwitz. |
| |
| 10.3 | | Option Agreement, dated November 17, 2003, by and between Yak Communications Inc. and Patricia Golding. |
| |
| 10.4 | | Option Agreement, dated November 17, 2003, by and between Yak Communications Inc. and Taras Kapanaiko. |
| |
| 31 | | Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32 | | Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
(b) Reports on Form 8-K.
On November 14, 2003, we filed a current report on Form 8-K reporting under Item 9—“Information Provided Under Item 12 (Results of Operations And Financial Condition)” our results of operations and financial condition for the quarter ended September 30, 2003.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
Date: February 17, 2004 | | | | | | YAK COMMUNICATIONS INC. |
| | | | |
| | | | | | | By: | | /s/ Charles Zwebner
|
| | | | | | | | | Charles Zwebner, Chief Executive Officer and Principal Financial Officer |
11
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | |
| | | Note
| | December 31,
2003
| | June 30, 2003
|
| | | | | $ | | $ |
| ASSETS |
CURRENT | | | | | | |
Cash and cash equivalents | | | | 3,881,805 | | 5,442,538 |
Accounts receivable, net | | 3 | | 14,155,969 | | 9,336,032 |
Unbilled revenue | | | | 486,956 | | — |
Income taxes recoverable | | | | 88,202 | | — |
Prepaid expenses and sundry | | | | 996,351 | | 656,939 |
| | | | |
| |
|
| | | | | 19,609,283 | | 15,435,509 |
PROPERTY AND EQUIPMENT, NET | | 4 | | 7,129,072 | | 13,858,204 |
DEFERRED ACQUISITION COSTS | | | | — | | 1,659,458 |
LOAN RECEIVABLE | | 7 | | 379,305 | | 160,925 |
INVESTMENT IN AFFILIATE | | 8 | | 405,507 | | 470,905 |
INTANGIBLES, NET | | 9 | | 1,800,000 | | — |
GOODWILL | | 9 | | 538,939 | | — |
| | | | |
| |
|
| | | | | 29,862,106 | | 31,585,001 |
| | | | |
| |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-1
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | | |
| | | Note
| | December 31,
2003
| | June 30, 2003
|
| | | | | $ | | $ |
| LIABILITIES |
CURRENT | | | | | | |
Accounts payable and accrued liabilities | | | | 3,486,114 | | 2,675,110 |
Amounts due for network access and usage | | | | 1,010,215 | | 966,111 |
Amounts due to long distance carriers | | | | 6,145,850 | | 3,123,583 |
Amounts due for equipment | | | | 555,352 | | 351,727 |
Due to Factor | | 3 | | 5,306,266 | | 4,689,751 |
Income taxes payable | | | | — | | 613,051 |
Short-term notes payable | | 10 | | 160,000 | | 400,000 |
Current portion of advances from TELUS Communications Inc. | | 11 | | 1,287,400 | | 1,030,716 |
Current portion of obligations under capital leases | | 12 | | 14,264 | | 13,008 |
Current portion of note payable | | | | — | | 99,824 |
Deferred revenue | | | | 1,028,213 | | — |
| | | | |
| |
|
| | | | | 18,993,674 | | 13,962,881 |
| | | | |
| |
|
LONG-TERM DEBT | | | | | | |
Advances from TELUS Communications Inc. | | 11 | | 1,006,347 | | 1,585,270 |
Obligations under capital leases | | 12 | | 10,386 | | 14,606 |
Note payable | | 5 | | — | | 8,435,176 |
| | | | |
| |
|
| | | | | 1,016,733 | | 10,035,052 |
| | | | |
| |
|
DEFERRED INCOME TAXES | | 13 | | 391,022 | | 1,858,998 |
| | | | |
| |
|
| | | | | 20,401,429 | | 25,856,931 |
| | | | |
| |
|
| STOCKHOLDERS’ EQUITY |
| | | |
COMMON STOCK | | 14 | | 210,715 | | 199,266 |
ADDITIONAL PAID-IN CAPITAL | | | | 2,183,492 | | 2,050,315 |
ACCUMULATED OTHER COMPREHENSIVE INCOME - TRANSLATION ADJUSTMENT | | | | 1,124,911 | | 477,080 |
RETAINED EARNINGS | | | | 5,941,559 | | 3,001,409 |
| | | | |
| |
|
| | | | | 9,460,677 | | 5,728,070 |
| | | | |
| |
|
| | | | | 29,862,106 | | 31,585,001 |
| | | | |
| |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | |
| | | Note
| | Common stock
| | | Additional
paid-in
capital
| | | Accumulated
Other
comprehensive
income
| | Retained
earnings
(deficit)
| | | Stockholders’
Equity (Deficit)
| |
| | | Shares
| | | Amount
| | | | | |
| | | | | | | | $ | | | $ | | | $ | | $ | | | $ | |
Balance, June 30, 2002 | | | | 4,792,158 | | | 201,521 | | | 1,732,060 | | | 67,232 | | (487,111 | ) | | 1,513,702 | |
Foreign currency translation adjustment | | | | — | | | — | | | — | | | 409,848 | | — | | | 409,848 | |
Common stock redeemed | | | | (400,000 | ) | | (4,000 | ) | | (796,000 | ) | | — | | — | | | (800,000 | ) |
Common stock issued for cash | | | | 160,000 | | | 1,600 | | | 998,400 | | | — | | — | | | 1,000,000 | |
Common stock issued for services | | | | 14,500 | | | 145 | | | 115,855 | | | — | | — | | | 116,000 | |
Net income | | | | — | | | — | | | — | | | — | | 3,488,520 | | | 3,488,520 | |
| | | | |
|
| |
|
| |
|
| |
| |
|
| |
|
|
Balance, June 30, 2003 | | | | 4,566,658 | | | 199,266 | | | 2,050,315 | | | 477,080 | | 3,001,409 | | | 5,728,070 | |
Foreign currency translation adjustment | | | | — | | | — | | | — | | | 647,831 | | — | | | 647,831 | |
Common stock issued to obtain note payable | | | | 10,000 | | | 100 | | | 89,900 | | | — | | — | | | 90,000 | |
Common stock issued for services | | | | 4,500 | | | 45 | | | 50,987 | | | — | | — | | | 51,032 | |
Common stock issued in exchange for stock options surrendered | | | | 1,130,467 | | | 11,304 | | | (11,304 | ) | | — | | — | | | — | |
Stock compensation expense | | 6 | | — | | | — | | | 3,594 | | | — | | — | | | 3,594 | |
Net income | | | | — | | | — | | | — | | | — | | 2,940,150 | | | 2,940,150 | |
| | | | |
|
| |
|
| |
|
| |
| |
|
| |
|
|
Balance, December 31, 2003 | | | | 5,711,625 | | | 210,715 | | | 2,183,492 | | | 1,124,911 | | 5,941,559 | | | 9,460,677 | |
| | | | |
|
| |
|
| |
|
| |
| |
|
| |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | |
| | | Note
| | Three months ended December 31,
| | | Six months ended December 31,
| |
| | | 2003
| | | 2002
| | | 2003
| | | 2002
| |
| | | | | $ | | | $ | | | $ | | | $ | |
NET REVENUE | | | | 20,240,329 | | | 9,297,089 | | | 39,031,547 | | | 17,476,194 | |
COST OF REVENUE | | | | 13,296,799 | | | 5,433,374 | | | 25,493,318 | | | 10,832,871 | |
| | | | |
|
| |
|
| |
|
| |
|
|
GROSS MARGIN | | | | 6,943,530 | | | 3,863,715 | | | 13,538,229 | | | 6,643,323 | |
| | | | |
|
| |
|
| |
|
| |
|
|
EXPENSES | | | | | | | | | | | | | | |
General and administration | | | | 2,805,131 | | | 900,625 | | | 5,050,270 | | | 1,589,828 | |
Sales and marketing | | | | 1,076,959 | | | 1,046,334 | | | 1,971,263 | | | 2,035,746 | |
Interest on note payable | | | | 149,233 | | | — | | | 302,698 | | | — | |
Accounts receivable financing | | | | 141,713 | | | 112,380 | | | 291,916 | | | 201,955 | |
Common stock issued to obtain note payable | | | | 44,300 | | | — | | | 89,600 | | | — | |
Organizational and start-up costs | | | | 53,623 | | | 47,762 | | | 86,647 | | | 106,534 | |
Share of net loss of affiliate | | | | 29,975 | | | — | | | 65,398 | | | — | |
Interest on capital lease obligations | | | | 1,483 | | | 3,715 | | | 3,127 | | | 8,631 | |
Interest earned | | | | (17,901 | ) | | — | | | (37,847 | ) | | | |
Income from joint marketing agreement | | | | (150,000 | ) | | — | | | (300,000 | ) | | | |
Depreciation and amortization | | | | 615,820 | | | 236,981 | | | 1,468,788 | | | 358,821 | |
| | | | |
|
| |
|
| |
|
| |
|
|
| | | | | 4,750,336 | | | 2,347,797 | | | 8,991,860 | | | 4,301,515 | |
| | | | |
|
| |
|
| |
|
| |
|
|
INCOME BEFORE INCOME TAX | | | | 2,193,194 | | | 1,515,918 | | | 4,546,369 | | | 2,341,808 | |
PROVISION FOR INCOME TAXES | | 13 | | 851,802 | | | 778,556 | | | 1,606,219 | | | 959,733 | |
| | | | |
|
| |
|
| |
|
| |
|
|
NET INCOME | | | | 1,341,392 | | | 737,362 | | | 2,940,150 | | | 1,382,075 | |
OTHER COMPREHENSIVE INCOME | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | 679,761 | | | (3,629 | ) | | 647,831 | | | (55,421 | ) |
| | | | |
|
| |
|
| |
|
| |
|
|
COMPREHENSIVE INCOME | | | | 2,021,153 | | | 733,733 | | | 3,587,981 | | | 1,326,654 | |
| | | | |
|
| |
|
| |
|
| |
|
|
BASIC EARNINGS PER SHARE | | 15 | | 0.15 | | | 0.08 | | | 0.32 | | | 0.14 | |
| | | | |
|
| |
|
| |
|
| |
|
|
DILUTED EARNINGS PER SHARE | | 15 | | 0.12 | | | 0.06 | | | 0.26 | | | 0.11 | |
| | | | |
|
| |
|
| |
|
| |
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING | | | | 9,122,938 | | | 9,584,316 | | | 9,166,460 | | | 9,584,316 | |
| | | | |
|
| |
|
| |
|
| |
|
|
WEIGHTED AVERAGE NUMBER OF COMMON SHARES - ASSUMING DILUTION | | | | 11,439,604 | | | 12,152,316 | | | 11,425,260 | | | 12,152,316 | |
| | | | |
|
| |
|
| |
|
| |
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | | | | |
| | | Note
| | Three months ended
December 31,
| | | Six months ended December 31,
| |
| | | 2003
| | | 2002
| | | 2003
| | | 2002
| |
| | | | | $ | | | $ | | | $ | | | $ | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | |
Net income | | | | 1,341,392 | | | 737,362 | | | 2,940,150 | | | 1,382,075 | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | | |
Depreciation and amortization | | | | 615,820 | | | 236,981 | | | 1,468,788 | | | 358,821 | |
Deferred income taxes | | | | 793,705 | | | 38,280 | | | 1,604,774 | | | 69,955 | |
Share of net loss of affiliate | | | | 29,975 | | | — | | | 65,398 | | | — | |
Stock compensation expense | | | | 3,594 | | | — | | | 3,594 | | | — | |
Common stock issued to obtain note payable | | | | — | | | — | | | 45,300 | | | — | |
Stock issued for services rendered | | | | 51,032 | | | 1,617 | | | 51,032 | | | 1,617 | |
Changes in assets and liabilities | | 17 | | (277,023 | ) | | 55,534 | | | 767,521 | | | (702,703 | ) |
| | | | |
|
| |
|
| |
|
| |
|
|
Net cash from operating activities | | | | 2,558,495 | | | 1,069,774 | | | 6,946,557 | | | 1,109,765 | |
| | | | |
|
| |
|
| |
|
| |
|
|
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | |
Investment in joint venture | | | | — | | | (100,000 | ) | | — | | | (100,000 | ) |
Purchase of property and equipment | | | | (1,196,733 | ) | | (259,997 | ) | | (2,776,037 | ) | | (497,288 | ) |
Proceeds from sale of assets | | | | — | | | 5,928 | | | — | | | 5,928 | |
Purchase of shares of Contour Telecom | | | | (155,279 | ) | | — | | | (5,472,712 | ) | | — | |
Foreign exchange difference on purchase of shares of Contour Telecom | | | | (311,818 | ) | | — | | | (225,167 | ) | | — | |
Loan receivable | | | | (127,815 | ) | | — | | | (218,380 | ) | | — | |
| | | | |
|
| |
|
| |
|
| |
|
|
Net cash used in investing activities | | | | (1,791,645 | ) | | (354,069 | ) | | (8,692,296 | ) | | (591,360 | ) |
| | | | |
|
| |
|
| |
|
| |
|
|
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | |
Repayments on obligations under capital leases | | | | (2,197 | ) | | (43,856 | ) | | (2,965 | ) | | (94,659 | ) |
Advances from TELUS Communications Inc. | | | | (207,843 | ) | | 531,354 | | | (322,239 | ) | | 1,022,250 | |
Repayments on note payable | | | | (833,570 | ) | | — | | | (953,570 | ) | | — | |
Issuance of note payable | | | | — | | | — | | | 713,570 | | | — | |
Repayments of principal portion of note payable | | | | (24,733 | ) | | — | | | (49,039 | ) | | — | |
| | | | |
|
| |
|
| |
|
| |
|
|
Net cash provided by financing activities | | | | (1,068,343 | ) | | 487,498 | | | (614,243 | ) | | 927,591 | |
| | | | |
|
| |
|
| |
|
| |
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS | | | | 889,791 | | | — | | | 799,249 | | | — | |
| | | | |
|
| |
|
| |
|
| |
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | | | 588,298 | | | 1,203,203 | | | (1,560,733 | ) | | 1,445,996 | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | | 3,293,507 | | | 825,306 | | | 5,442,538 | | | 582,513 | |
| | | | |
|
| |
|
| |
|
| |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD | | | | 3,881,805 | | | 2,028,509 | | | 3,881,805 | | | 2,028,509 | |
| | | | |
|
| |
|
| |
|
| |
|
|
Supplemental disclosure of cash flow information: | | | | | | | | | | | | | | |
Interest paid | | | | 150,716 | | | — | | | 305,825 | | | — | |
Taxes paid | | | | 674,619 | | | — | | | 999,678 | | | — | |
Supplemental disclosure of non-cash investing and financing activities | | | | | | | | | | | | | | |
Issuance of common stock for services rendered | | | | 51,032 | | | — | | | 51,032 | | | — | |
Issuance of common stock to obtain note payable | | | | — | | | — | | | 90,000 | | | — | |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 1. | ORGANIZATION AND BUSINESS |
On December 15, 2003, the Company changed its name from Yak Communications (USA) Inc. to Yak Communications Inc Yak Communications Inc. is a switch based reseller specializing in offering dial-around long-distance services to consumers. The Company was incorporated in the State of Florida on December 24, 1998 and operates as a holding company of its wholly-owned subsidiaries in the United States and Canada.
The Company began offering its services to consumers in Canada in July 1999 and in the United States commencing December 2001.
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The accompanying unaudited consolidated financial statements of Yak Communications Inc. (“The Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB of Regulations S-B. Accordingly, they do not include all the information, necessary for a comprehensive presentation of financial position and results of operations.
It is management’s opinion, however, that all material adjustments have been made which are necessary for a fair financial statement presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year.
For further information, refer to the consolidated financial statements and footnotes included in the Company’s annual report on Form 10-KSB for the year ended June 30, 2003.
Principles of consolidation
These consolidated financial statements include the accounts of Yak Communications Inc. and its wholly-owned subsidiaries - Yak Communications (America), Inc., Yak Communications (Canada) Inc. and Contour Telecom Inc. (collectively referred to as the “Company”). All intercompany balances and transactions are eliminated upon consolidation.
F-6
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Use of estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. These estimates are reviewed periodically and, as adjustments become necessary, they are reported in earnings in the period in which they become known.
Revenue recognition
The Company records revenue using the following recognition policies:
| | (a) | Dial-around services and the resale of long-distance services revenues are recorded at the time of customer usage based upon minutes of use. |
| | (b) | Service revenues of Argos Telecom are recognized as the related client telecommunications costs, less applicable supplier discounts, are incurred. |
| | (c) | Revenue from the resale of voice and data telecommunications service of Contour Telecom Inc. is recorded at the time the Company is billed by the respective service providers. |
| | (d) | Management fees of Contour Telecom Inc. are recorded on a monthly basis over the term of the management agreement. |
Cost of revenue
Cost of revenue includes network costs that consist of the cost of long-distance services, processing costs, line access and usage costs. These costs are recognized when incurred.
F-7
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Cost of revenue (cont’d)
Argos Telecom records voice and data telecommunications services costs as incurred by the respective telecommunications carriers.
Contour Telecom Inc.’s supplier service costs come directly from the telecommunications carriers and are recorded once billed.
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and term deposits with original maturity dates of less than 90 days.
Property and equipment
Property and equipment is stated at cost less accumulated depreciation which is provided over the estimated useful lives of the assets as follows:
| | |
Telecom switching systems | | 11% to 20% declining balance |
“Next Generation” software | | 20% declining balance |
Billing, administration and customer service systems | | 20% declining balance |
Installed lines | | 20% declining balance |
Computer software | | 20% declining balance |
Carrier identification codes loading | | 20% declining balance |
Office furniture and equipment | | 20% declining balance |
Computer equipment | | 20% declining balance |
Leasehold improvements | | over term of the lease |
Automobile | | 20% declining balance |
Cost includes major expenditures for improvements and replacements which extend useful lives or increase capacity of assets as well as expenditures necessary to place assets into readiness for use. Costs incurred during the application development stage are capitalized and amortized over the estimated useful life of the systems. Expenditures for maintenance and repairs are expensed as incurred.
F-8
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Property and equipment (cont’d)
The Company periodically evaluates the realizability of its property and equipment. In making such evaluations, the Company compares certain financial indicators such as expected undiscounted future revenues and cash flows to the carrying amount of the assets.
Assets under capital leases are amortized using rates consistent with similar assets.
Intangibles
Customer lists are stated at cost less accumulated amortization which is provided on the straight-line basis over five years.
Joint venture
The Company’s proportionate share of revenues, expenses, assets and liabilities in unincorporated joint venture are consolidated in the Company’s accounts.
Investment in affiliate
The Company records its investment in affiliate under which it exercises significant influence by the equity method. Under this method, an investment is recorded at its original cost and its carrying value is thereafter adjusted to include the Company’s share of the income or loss for each fiscal year of the entity since its acquisition.
Unbilled revenue
Unbilled revenue represents services performed that have not yet been invoiced.
Unearned revenue
Unearned revenue represents billings in advance of services performed and customer deposits for future services.
F-9
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Cost of Start-up Activities
The Company expenses the cost of start-up activities and organizational costs as incurred in accordance with statement of position 98-5 “Reporting on the Costs of Start-up Activities”.
Advertising and promotion expense
The production costs of commercials and programming are charged to operations in the fiscal year during which the production is first aired. The costs of other advertising, promotion and marketing programs are charged to operations in the fiscal year incurred. The cost of promotional marketing materials are deferred and expensed as used.
Income taxes
The Company accounts for income taxes in accordance with SFAS No. 109 “Accounting for Income Taxes” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed periodically for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Computation of earnings per common share
Basic earnings per share is computed by dividing the earnings attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options.
F-10
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Foreign currency translation and foreign assets
In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”), No. 52, “Foreign Currency Translation,” assets and liabilities of the Company’s foreign subsidiary were translated into United States dollars at the exchange rates in effect on the reporting date. Income and expenses are translated at an average exchange rate for the respective period. For the foreign subsidiary which utilizes its local currency as its functional currency, the resulting translation gains and losses are included in other comprehensive income. Gains or losses resulting from foreign exchange transactions are reflected in earnings.
Stock-based compensation
Compensation expense under stock options is reported using the intrinsic method. Under this method, compensation cost is reflected in net income for options granted with an exercise price less than the market price of the underlying common stock at the date of grant.
If compensation cost for the Company’s grants for stock-based compensation had been recorded consistent with the fair value-based method of accounting per SFAS No. 123, the Company’s pro forma net income, and pro forma basic and diluted net income per share for the three and six months ending December 31, 2003 and 2002, would be as follows:
| | | | | | | | |
| | | Three months ended
December 31,
| | Six months ended
December 31,
|
| | | 2003
| | 2002
| | 2003
| | 2002
|
| | | $ | | $ | | $ | | $ |
Net income as reported | | 1,341,392 | | 737,362 | | 2,940,150 | | 1,382,075 |
Pro forma net income | | 1,324,884 | | 737,362 | | 2,923,642 | | 1,382,075 |
| | | | |
Basic net income per share | | | | | | | | |
As reported | | 0.15 | | 0.08 | | 0.32 | | 0.14 |
Pro forma | | 0.15 | | 0.08 | | 0.32 | | 0.14 |
| | | | |
Diluted net income per share | | | | | | | | |
As reported | | 0.12 | | 0.06 | | 0.26 | | 0.11 |
Pro forma | | 0.12 | | 0.06 | | 0.26 | | 0.11 |
F-11
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Stock-based compensation (cont’d)
At December 31, 2003 115,000 options were outstanding with an exercise price of $13.00 per share, with a weighted average remaining life of 4.9 years. None of these options are vested at December 31, 2003.
In addition to this Stock Option Plan, on December 21, 2000, nonqualified options for 1,284,000 common shares were granted to an individual who is a director and chief executive office and are exercisable at $1.56 per share on or before December 31, 2003, or upon the sale of the Company. These options were exchanged for $1,130,467 shares of Common Stock on December 30, 2003 (see Note 14).
Financial instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires disclosure of the fair value of certain financial instruments for which it is practicable to estimate fair value. For purposes of the disclosure requirements, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and other current liabilities are reasonable estimates of their fair value due to the short-term maturity of the underlying financial instruments. The carrying value of the capital leases is a reasonable estimate of its fair value based on current rates for equipment obligations.
The estimated difference between the carrying value and the fair value of the advances from TELUS Communications Inc. in which no interest has been charged is not material.
F-12
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont’d) |
Financial instruments (cont’d)
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, unbilled revenue, accounts payable and accrued liabilities and deferred revenue. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest or currency risks arising from these financial instruments. The Company has in place systems to prevent and detect fraud. On occasion, defaults occur on receivables. The Company makes a provision when deemed necessary. As of December 31, 2003 and June 30, 2003, the allowance for doubtful accounts was approximately $369,200 and $15,000, respectively. The Company places its cash and cash equivalents in high quality financial instruments.
The amounts due to factor are secured by a pledge of the Company’s accounts receivable. The Company has an agreement to sell an undivided interest in certain accounts receivable with recourse to a Factor. Payments are collected by the Factor from the sold accounts receivable; the collections are reinvested by the Factor in new accounts receivable of the Company, and a yield, as defined in the agreement is transferred to the Factor. As at December 31, 2003, the amount sold under the agreement, expiring February 2004, that had not been collected was approximately $7,650,000 (June 30, 2003 - $6,177,000) which will be forwarded to the Company once collected after repayment of the Factor’s advances. The agreement is being renewed for an additional two years under more favourable terms.
F-13
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Property and equipment consist of the following:
| | | | | | | | |
| | | Cost
| | Accumulated
depreciation
| | December 31,
2003
| | June 30,
2003
|
| | | | Net book value
|
| | | $ | | $ | | $ | | $ |
Telecom switching systems | | 5,423,830 | | 2,411,503 | | 3,012,327 | | 2,462,928 |
“Next Generation” software (Note 5) | | 1,682,560 | | 118,586 | | 1,563,974 | | 9,608,479 |
Billing, administration and customer service systems | | 1,530,061 | | 573,098 | | 956,963 | | 780,259 |
Installed lines | | 793,214 | | 215,549 | | 577,665 | | 495,593 |
Computer software | | 749,769 | | 434,392 | | 315,377 | | 140,113 |
Carrier identification codes loading | | 357,218 | | 72,469 | | 284,749 | | 195,566 |
Office furniture and equipment | | 550,881 | | 359,785 | | 191,096 | | 101,218 |
Computer equipment | | 1,367,569 | | 1,244,639 | | 122,930 | | — |
Leasehold improvements | | 175,725 | | 75,225 | | 100,500 | | 70,321 |
Automobile | | 6,716 | | 3,225 | | 3,491 | | 3,727 |
| | |
| |
| |
| |
|
| | | 12,637,543 | | 5,508,471 | | 7,129,072 | | 13,858,204 |
| | |
| |
| |
| |
|
Telecom switching systems include assets under capital leases having a net book value of approximately $1,268,000 as of December 31, 2003 and $1,838,000 as of June 30, 2003.
Depreciation expense for equipment under capital leases for three-month and six-month periods ended December 31, 2003 was approximately $265,000 and $555,000 respectively.
| 5. | NEXT GENERATION SOFTWARE |
On June 30, 2003, the Company purchased certain “next generation” telecommunications software from an unrelated third party for $9,500,000. Consideration was $565,000 in cash and short-term note of $400,000 and the balance a long-term note in the amount of $8,535,000. This long-term note bears interest at 7.25% per annum and is payable $174,965 including interest quarterly and is due July 15, 2012. The sole recourse by the holder of this long-term note is the software.
F-14
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 5. | NEXT GENERATION SOFTWARE (cont’d) |
On June 24, 2003, the Company entered into a joint marketing agreement with the vendor of the software referred to above for the exploitation of the software outside of Canada by non-customers of the Company. The Company is entitled to receive 4% of all gross revenue with minimum quarterly payments of $150,000 to June 30, 2006 and thereafter 2.75% of gross revenue with minimum quarterly payments of $175,000. The Company is entitled to offset any receivable under the joint marketing agreement against the note payable.
After a period to further evaluate this software, management has made a decision to reclassify the long-term note payable from June 30, 2003 of $8,510,694 to offset the software previously recorded. This is due to the fact the long-term note is non-recourse and cash flow for the repayments is earned from our joint marketing agreement with the note holder. Consequently, management will only record its own cash payments under the long-term note as consideration for the software.
Effective June 30, 1999, the Company adopted a Stock Option Plan (the “Plan”) which permits the issuance of stock options to selected employees and directors. The Company reserved 640,000 shares of common stock for grant under the Plan. Options granted may be either nonqualified or incentive stock options and will expire no later than 20 years from the date of grant (10 years for incentive options).
On November 17, 2003, 115,000 options were granted to three officers of the Company, with an exercise price of $13.00. The market price of the stock on that date was $14.50. The holders may exercise 25% of their options on each anniversary date, and the options expire November 17, 2008. The Company has recorded a deferred compensation expense of $3,594 in connection with the grant of these options in the quarter ended December 31, 2003.
The Company has adopted only the disclosure provision of SFAS 123, “Accounting for Stock-Based Compensation.” It applies APB Opinion No. 25, “Accounting for Stock Issued to Employees, “ and related interpretations in accounting for plans and does not recognize compensation expense for its stock-based compensation plan if the exercise prices equals or exceeds the fair market value on the date of grant.
F-15
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has entered into a commercial services and marketing agreement with a company in Peru to provide up to $400,000 to assist in its development of dial-around long-distance services for which the Company will process its international traffic and earn 50% of the profits generated by the business. At December 31, 2003 and June 30, 2003 the Company had made advances of $829,021 and $392,261 respectively under this agreement, of which $379,305 (June 30, 2003 - $160,925) is a loan receivable (see Note 16).
| 8. | INVESTMENT IN AFFILIATE |
On March 28, 2003, the Company purchased 20% of the outstanding shares of Odyssey Management Group, Inc., (“Odyssey”) a corporation of which the Company’s chairman is a shareholder and director, for $500,000. Consideration was cash for $174,290 and a note for $325,710, payable in installments of $36,190 per month commencing April 15, 2003. Repayment of the note was accelerated. The balance outstanding at December 31, 2003 and June 30, 2003 was $nil and $110,817 respectively and is included in accounts payable.
The Company has the option until March 28, 2005, to purchase up to 51% of the outstanding shares of Odyssey Management Group, Inc. at their fair market.
| | | | | | |
| | | December 31,
2003
| | | June 30,
2003
| |
| | | $ | | | $ | |
Shares at cost | | 470,905 | | | 500,000 | |
Share of net loss of affiliate | | (65,398 | ) | | (29,095 | ) |
| | |
|
| |
|
|
| | | 405,507 | | | 470,905 | |
| | |
|
| |
|
|
Odyssey is in the development stage providing real time data transfer for electronic money cards and currently operates in the State of Florida. Odyssey has recently been granted regulatory approval to become a registered “money transmitter” in the State of Florida.
F-16
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On July 2, 2003, the Company acquired all of the outstanding shares and debt of Contour Telecom Inc., which included its wholly-owned subsidiary, Argos Telecom Inc. Contour Telecom Inc. is a provider of outsourced telecommunications management services. Argos Telecom Inc., the wholly-owned subsidiary, is a value added reseller of telecommunications services. Consideration for this purchase was $6,017,793 in cash plus costs associated with the transaction of $1,114,377. The goodwill recognized on this transaction is not expected to be deductible for tax purposes. This acquisition was accounted for under the purchase method of accounting, and the operating results of the business are included in the consolidated operating results from the effective date of acquisition. The purchase price has been allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on the exchange rate in effect on July 2, 2003 at their estimated fair values as follows:
| | | |
| | | $
| |
Current assets | | 5,377,419 | |
Capital assets | | 241,942 | |
Future tax asset | | 3,125,491 | |
Customer lists | | 2,000,000 | |
Goodwill | | 461,238 | |
| | |
|
|
| | | 11,206,090 | |
Liabilities assumed | | (4,073,920 | ) |
| | |
|
|
Net assets acquired | | 7,132,170 | |
| | |
|
|
Customer lists are being amortized on the straight-line basis over five years.
F-17
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In conjunction with the acquisition on July 2, 2003, management began implementing its plan to restructure operations. The estimated costs of this restructuring plan totalling approximately $700,000 is a result of the reduction of workforce and consolidation of operations and locations.
The unaudited pro-forma combined historical results, as if Contour Telecom Inc. had been acquired at the beginning of the six months ended December 31, 2002, are estimated to be:
| | |
| | | $
|
Net revenue | | 27,514,432 |
Net income (excludes Contour Telecom Inc. non-recurring impairments of $10,020,414) | | 1,406,388 |
Basic Earnings per share | | 0.15 |
Fully Diluted Earnings per share | | 0.12 |
The pro-forma results are not necessarily indicative of what actually would have accrued if the acquisition had been completed as of the beginning of the period presented.
| 10. | SHORT-TERM NOTES PAYABLE |
| | | | |
| | | December 31,
2003
| | June 30,
2003
|
| | | $ | | $ |
Non-interest bearing, repayable in monthly payments of $40,000. | | 160,000 | | 400,000 |
| | |
| |
|
F-18
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 11. | ADVANCES FROM TELUS COMMUNICATIONS INC. (Telus) |
Telus provides the Company with marketing credits to a total maximum value of $3,250,000. The marketing credits are calculated as 25% of the value of monthly billed revenue to the Company by Telus in the preceding month to a maximum of $270,000 per month.
The Company is restricted to spend this amount on advertising and promotional activities within sixty days of the credits being advanced to the Company.
Repayment of the marketing credits commenced September 15, 2003 and is ending February 15, 2005. Repayments are by way of paying an additional $0.005/minute, at a minimum of $100,686 per month. The repayments are non-interest bearing as long as no payments are in default, and are classified as follows:
| | | | |
| | | December 31,
2003
| | June 30,
2003
|
| | | $ | | $ |
Current | | 1,287,400 | | 1,030,716 |
Long-term | | 1,006,347 | | 1,585,270 |
| | |
| |
|
| | | 2,293,747 | | 2,615,986 |
| | |
| |
|
F-19
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 12. | OBLIGATIONS UNDER CAPITAL LEASES |
The Company’s capital leases are for terms of 24 to 36 months at annual interest rates ranging from 9.25% to 15.00%.
The future minimum lease payments required under the capital lease agreements are as follows:
| | |
| | | $
|
Year ending December 31, 2004 | | 17,561 |
Year ending December 31, 2005 | | 8,781 |
| | |
|
Total minimum lease payments | | 26,342 |
Amounts representing interest | | 1,692 |
| | |
|
Principal | | 24,650 |
Current portion | | 14,264 |
| | |
|
| | | 10,386 |
| | |
|
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The deferred tax liabilities relate to the difference between the depreciation used for Canadian tax purposes and financial reporting purposes.
The provision for income taxes for the six months ended December 31, 2003 includes $1,604,774 (2002 - $69,955) which represents the deferred income tax portion of the provision.
F-20
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
100,000,000 shares authorized, no par value, stated value $0.01 per share.
On March 3, 2003, 400,000 common shares were redeemed by the Company for $800,000.
On June 17, 2003, 120,000 common shares were issued for $750,000.
On June 30, 2003, 40,000 common shares were issued for $250,000.
On June 30, 2003, 14,500 common shares were issued for services rendered of $116,000.
On July 15, 2003, 10,000 common shares were issued to obtain a loan in the amount of $713,570 due December 31, 2003.
On December 30, 2003, as part of a transaction involving corporate intermediaries, an individual who is a director and chief executive officer, surrendered options in exchange for the receipt of 1,130,467 shares of Common Stock. For purposes of this exchange, which took the form of the redemption of certain stock of a corporate intermediary, the option was valued at an aggregate of $12,815,000, or 1,130,467 shares of Common Stock assuming a discounted market price of $11.34 per share as of November 30, 2003, which is the amount of shares equal to the Common Stock underlying such option had the option been exercised on a cashless basis as otherwise provided in the subject option. The Company has accounted for the transaction as a non-monetary exchange of shares that do not represent the culmimination of the earnings process. Accordingly the exchange was recorded at carrying value, with no dividend recorded on the redemption of the stock.
On December 31, 2003, 4,500 common shares were issued for services rendered of $51,032.
On December 15, 2003 the Company’s directors approved a two-for-one stock split on the Company’s outstanding shares, to be distributed on January 29, 2004 to shareholders of record at January 15, 2004. For every one share of the Company’s common stock held on the record date, a holder will receive one additional share. The per share information has been adjusted retroactively for the stock split.
F-21
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Included in the consolidated financial statements are the Company’s proportionate share of revenues, expenses, assets and liabilities of the unincorporated joint venture as follows:
| | | | | | |
| | | December 31,
2003
| | | June 30,
2003
| |
| | | $ | | | $ | |
Assets | | | | | | |
Prepaid expenses | | 56,074 | | | — | |
Property and equipment | | 118,000 | | | 95,679 | |
| | |
|
| |
|
|
| | | 174,074 | | | 95,679 | |
| | |
|
| |
|
|
Liabilities | | | | | | |
Accounts payable | | — | | | 53,349 | |
Due to Yak Communications Inc. | | 379,305 | | | 160,925 | |
| | |
|
| |
|
|
| | | 379,305 | | | 214,274 | |
Deficit | | (205,241 | ) | | (118,595 | ) |
| | |
|
| |
|
|
Total liabilities and deficit | | 174,064 | | | 95,679 | |
| | |
|
| |
|
|
Revenue | | 5,128 | | | — | |
Expenses | | 90,774 | | | — | |
| | |
|
| |
|
|
Net loss | | (85,646 | ) | | — | |
| | |
|
| |
|
|
Cash used in operating activities | | (196,059 | ) | | — | |
Cash used in investing activities | | (22,321 | ) | | — | |
Cash provided by financing activities | | 218,380 | | | — | |
| | |
|
| |
|
|
Cash, beginning of year | | — | | | — | |
| | |
|
| |
|
|
Cash, end of year | | — | | | — | |
| | |
|
| |
|
|
F-22
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 17. | STATEMENT OF CASH FLOWS |
The following recap presents the detail of the net change in non-cash working capital presented in the statement of cash flows for the three months ended December 31, 2003 and 2002; and six months ended December 31, 2003 and 2002:
| | | | | | | | | | | | |
| | | Three months ended
December 31,
| | | Six months ended December 31,
| |
| | | 2003
| | | 2002
| | | 2003
| | | 2002
| |
| | | $ | | | $ | | | $ | | | $ | |
Decrease (increase) in: | | | | | | | | | | | | |
Accounts receivable | | (649,136 | ) | | (821,886 | ) | | (4,819,937 | ) | | (1,578,637 | ) |
Unbilled revenue | | (109,109 | ) | | — | | | (486,956 | ) | | — | |
Prepaid expenses and sundry | | (50,605 | ) | | (84,708 | ) | | (294,712 | ) | | (72,073 | ) |
Income taxes recoverable | | (88,202 | ) | | — | | | (88,202 | ) | | — | |
Deposits | | — | | | (63 | ) | | — | | | 2,233 | |
Increase (decrease) in: | | | | | | | | | | | | |
Deferred revenue | | 54,152 | | | — | | | 1,028,213 | | | — | |
Accounts payable and accrued liabilities | | 408,754 | | | 101,871 | | | 811,004 | | | 128,049 | |
Amounts due for network access and usage | | (974,304 | ) | | (143,092 | ) | | 44,104 | | | (139,235 | ) |
Amounts due to long distance carriers | | 998,947 | | | 357,970 | | | 3,022,267 | | | 405,709 | |
Amount due for equipment | | (225,304 | ) | | (88,196 | ) | | 203,625 | | | (101,041 | ) |
Due to Factor | | 619,129 | | | (866 | ) | | 616,515 | | | (229,818 | ) |
Income taxes payable | | (261,345 | ) | | 734,504 | | | (613,051 | ) | | 882,110 | |
Less: Net assets acquired from Contour | | — | | | — | | | 1,344,651 | | | — | |
| | |
|
| |
|
| |
|
| |
|
|
| | | (277,023 | ) | | 55,534 | | | 767,521 | | | (702,703 | ) |
| | |
|
| |
|
| |
|
| |
|
|
The following is the breakdown of amounts included in the purchase of Contour cash outflow:
| | | |
| | | $
| |
Future tax asset | | 3,224,165 | |
Customer lists | | 2,000,000 | |
Goodwill | | 538,939 | |
Capital assets | | 249,580 | |
Current assets net of liabilities | | 1,344,651 | |
| | |
|
|
Purchase price net of currency translation adjustment | | 7,357,335 | |
Currency translation adjustment | | (225,165 | ) |
| | |
|
|
Purchase price | | 7,132,170 | |
| | |
|
|
F-23
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company has operating lease commitments for its premises and commitments for leased lines which expire at various dates through July 2009. The future minimum lease payments (exclusive of operating costs and payments for additional volume) for the years ending December 31, are as follows:
| | |
| | | $
|
2004 | | 3,444,945 |
2005 | | 3,454,668 |
2006 | | 3,415,133 |
2007 | | 3,415,133 |
2008 | | 3,415,133 |
Under the terms of an agreement with one of their long distance providers, Contour Telecom Inc. and Argos Telecom Inc. are committed to purchasing a minimum amount of long distance for their customers use. The minimum amount of customer use is $1,960,067 for the year ending December 31, 2004 and $1,013,828 for the year ending December 31, 2005.
On September 11, 2003, the Company entered into an agreement to acquire a new telecommunications switch for approximately $2,000,000 of which $1,122,000 has been recorded. As at December 31, 2003, a further $909,000 was yet to be received and recorded. This amount is to be paid over 51 months at $17,822 per months commencing July 1, 2004.
| 19. | RELATED PARTY TRANSACTIONS |
| | (a) | The Company made advances for the periods ending December 31, 2003 and 2002 of $nil and $69,291 respectively from a corporation of which the Company’s chairman is a shareholder and director. |
| | (b) | The Company paid marketing and design fees for the periods ending December 31, 2003 and 2002 of $90,656 and $39,732 respectively to a corporation controlled by an officer and shareholder. |
F-24
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 19. | RELATED PARTY TRANSACTIONS (cont’d) |
| | (c) | The Company paid professional fees for legal services for the periods ending December 31, 2003 and 2002 of $61,540 and $21,220 respectively to a director and minority shareholder. |
| | (d) | The Company paid consulting fees for the periods ended December 31, 2003 and 2002 of $nil and $150,000 respectively to a shareholder for the development of international operations in Peru. This shareholder is a Director of the Company in Peru with which the Company has a commercial service and marketing agreement. |
| | (e) | The Company paid a management fee for the periods ended December 31, 2003 and 2002 of $nil and $90,000 respectively to a Corporation controlled by the Company’s chairman. |
All other related party transactions have been disclosed on the consolidated financial statements.
These transactions have all been accounted for at their exchange amounts.
The Company is dependent in Ontario, Quebec, British Columbia and Alberta upon carriers to provide billing and collection services to its customers under renewable agreements. The Company is also dependent upon TELUS Communications Inc. to provide billing, transport and handling services under a renewable agreement which expires in June 2004. Management expects that these agreements will automatically renew.
Effective July 1, 2003, the estimated useful life for existing telecom switching systems has been changed to reflect the expected replacement by the new Switch that was purchased in September, 2003 (see Note 18).
This change in estimate has been applied on a prospective basis and the effect of this change increased amortization for the period by approximately $555,000 and reduced net income for the period by approximately $555,000.
F-25
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| 22. | SEGMENTED AND RELATED INFORMATION |
The Company operates in one reportable segment in three geographic regions - Canada, United States and International. Summary information with respect to the Company’s operations by geographic regions are as follows:
| | | | | | |
| | | For the six months ended
| |
| | | December 31,
2003
| | | December 31,
2002
| |
| | | $ | | | $ | |
Net revenue | | | | | | |
Canada | | 38,519,619 | | | 16,761,142 | |
United States | | 485,001 | | | 715,052 | |
Peru | | 26,927 | | | — | |
| | |
|
| |
|
|
| | | 39,031,547 | | | 17,476,194 | |
| | |
|
| |
|
|
Operating profit (loss) | | | | | | |
Canada | | 5,519,809 | | | 3,547,806 | |
United States | | (877,776 | ) | | (1,049,323 | ) |
Peru | | (95,664 | ) | | (156,675 | ) |
| | |
|
| |
|
|
| | | 4,546,369 | | | 2,341,808 | |
| | |
|
| |
|
|
| | |
| | | December 31,
2003
| | | June 30, 2003
| |
| | | $ | | | $ | |
Assets | | | | | | |
Canada | | 27,867,880 | | | 30,237,617 | |
United States | | 1,780,623 | | | 1,251,705 | |
Peru | | 213,603 | | | 95,679 | |
| | |
|
| |
|
|
| | | 29,862,106 | | | 31,585,001 | |
| | |
|
| |
|
|
The Canadian assets include goodwill and intangible assets of $538,941 and $1,800,000 respectively.
F-26
YAK COMMUNICATIONS INC. AND SUBSIDIARIES
(formerly Yak Communications (USA), Inc.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Various lawsuits and claims are pending against the Company and estimated provisions have been included in current liabilities where appropriate. It is the opinion of management that the final determination of these claims will not have a material adverse effect on the financial position or the results of the Company.
F-27
Exhibit Index
| | |
Exhibit No.
| | Description
|
| |
| 10.1 | | Executive Employment Agreement, dated November 17, 2003, by and between Yak Communications Inc. and David B. Hurwitz. |
| |
| 10.2 | | Option Agreement, dated November 17, 2003, by and between Yak Communications Inc. and David B. Hurwitz. |
| |
| 10.3 | | Option Agreement, dated November 17, 2003, by and between Yak Communications Inc. and Patricia Golding. |
| |
| 10.4 | | Option Agreement, dated November 17, 2003, by and between Yak Communications Inc. and Taras Kapanaiko. |
| |
| 31 | | Certification of Chief Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
| 32 | | Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
